Tuesday, April 26, 2011

Let's Blame the Unicorn

Did you know that supply and demand, that fundamental principle of economics, applies to dollars the same way it applies to cars, gas, oil, corn, and every other for sale item in the world? What makes it different is that since dollars are the basis by which we operate our barter economy, the price of the dollar effects the price of everything we buy with dollars.

It may not seem like it in this recession, but there are more dollars floating around now than there were 15 years ago. A lot more dollars. As the supply of dollars has gone up, the value or price of the dollars has dropped. The supply didn't go up to meet some strong demand for dollars, in fact, the supply started moving rapidly up when the demand for dollars began to diminish during the world-wide recession. This wasn't an accident. The Federal Reserve created these new dollars on purpose. Creating the money helped to provide liquidity to the financial institutions during a time of crisis. This was the second part of the bank bailout, the one no one talks about.

What does this mean for the average person? Well, when your dollar is worth less (not worthless just yet) then things you buy with dollars require more of them. Prices go up. We talked about this the other day, despite the fed's assertions that core inflation is nothing to worry about, they've excluded food and fuel from the "core" numbers.

No one is admitting that this is a problem yet. Obama is looking at the greedy speculators (ie commodities investors who are betting that the price of oil will go up) and big bad oil companies. The oil companies are demonized for getting taxpayer subsidies. (quick aside - These big subsidies are essentially the same as allowing a small business person to write off the expenses of purchasing new equipment or hiring new employees from their gross income and are not as blatant a subsidy as giving a tax credit to GE or Whirlpool for manufacturing a product that they sell for a profit. Oil companies spend a LOT of money looking for oil, paying surveyors, landowners, geologists and then for exploratory wells, the "subsidies for big oil" allow them to expense these)

Other people blame the "free market" for this "non-core" inflation. This one always gets me. I have been looking for a "free market" for years. It doesn't exist. Our markets are so heavily regulated that to even reference them as "free" makes Adam Smith roll over in his grave. We do the best we can with the markets as we have them, but don't make the mistake of thinking that they're free. You show me a FREE market that causes this runaway inflation and I'll fly to your house on a Pegasus. Next time you hear someone say "the free market system has failed" ask them if it was the market or could one of the many layers of burdensome and inefficient regulations overlaying our markets have impacted that failure in any way?